IDEAS home Printed from https://ideas.repec.org/p/sef/csefwp/605.html
   My bibliography  Save this paper

Screening while Controlling an Externality

Author

Listed:

Abstract

We propose a tractable framework to introduce externalities into a monopolist screening model. Agents differ both in their payoff type and their influence, i.e. how strongly their action affects the aggregate externality. Applications range from non-linear pricing of a network good, to taxation or subsidization of industries that produce externalities (e.g. pollution and human capital formation). When both dimensions are unobserved (full screening) the optimal allocation satisfies lexicographic monotonicity: within a payoff-type, the monopolist optimally tilts the allocation towards influential agents to increase the externality, while standard IC drives monotonicity across payoff-types. We characterize the solution through a two-step ironing procedure that addresses the nonmonotonicity in virtual values arising from the countervailing impact of payoff-types and influence. The allocation is inefficient if and only if the payoff-type is unobservable. Only influence is observable, equilibrium utility can vary across the latter as it is used as a signal of the payoff-type. We provide sufficient conditions for (expected) rents from influence to emerge.

Suggested Citation

  • Franz Ostrizek & Elia Sartori, 2021. "Screening while Controlling an Externality," CSEF Working Papers 605, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    • Handle: RePEc:sef:csefwp:605
    as

    Download full text from publisher

    File URL: http://www.csef.it/WP/wp605.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Eyal Winter, 2004. "Incentives and Discrimination," American Economic Review, American Economic Association, vol. 94(3), pages 764-773, June.
    2. Sundararajan, Arun, 2004. "Nonlinear pricing and type-dependent network effects," Economics Letters, Elsevier, vol. 83(1), pages 107-113, April.
    3. Joseph Farrell & Garth Saloner, 1985. "Standardization, Compatibility, and Innovation," RAND Journal of Economics, The RAND Corporation, vol. 16(1), pages 70-83, Spring.
    4. Yang Zhang & Ying-Ju Chen, 2020. "Optimal Nonlinear Pricing in Social Networks Under Asymmetric Network Information," Operations Research, INFORMS, vol. 68(3), pages 818-833, May.
    5. Nima Haghpanah & Jason Hartline, 2021. "When Is Pure Bundling Optimal? [Commodity Bundling and the Burden of Monopoly]," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 88(3), pages 1127-1156.
    6. Andrea Galeotti & Benjamin Golub & Sanjeev Goyal, 2020. "Targeting Interventions in Networks," Econometrica, Econometric Society, vol. 88(6), pages 2445-2471, November.
    7. Jehiel, Philippe & Moldovanu, Benny, 2001. "Efficient Design with Interdependent Valuations," Econometrica, Econometric Society, vol. 69(5), pages 1237-1259, September.
    8. Jean-Charles Rochet & Philippe Chone, 1998. "Ironing, Sweeping, and Multidimensional Screening," Econometrica, Econometric Society, vol. 66(4), pages 783-826, July.
    9. Coralio Ballester & Antoni Calvó-Armengol & Yves Zenou, 2006. "Who's Who in Networks. Wanted: The Key Player," Econometrica, Econometric Society, vol. 74(5), pages 1403-1417, September.
    10. Piotr Dworczak & Scott Duke Kominers & Mohammad Akbarpour, 2021. "Redistribution Through Markets," Econometrica, Econometric Society, vol. 89(4), pages 1665-1698, July.
    11. Andrea Galeotti & Sanjeev Goyal, 2009. "Influencing the influencers: a theory of strategic diffusion," RAND Journal of Economics, RAND Corporation, vol. 40(3), pages 509-532, September.
    12. Toikka, Juuso, 2011. "Ironing without control," Journal of Economic Theory, Elsevier, vol. 146(6), pages 2510-2526.
    13. Csorba, Gergely, 2008. "Screening contracts in the presence of positive network effects," International Journal of Industrial Organization, Elsevier, vol. 26(1), pages 213-226, January.
    14. Itay P. Fainmesser & Andrea Galeotti, 2020. "Pricing Network Effects: Competition," American Economic Journal: Microeconomics, American Economic Association, vol. 12(3), pages 1-32, August.
    15. Abhijit Banerjee & Arun G Chandrasekhar & Esther Duflo & Matthew O Jackson, 2019. "Using Gossips to Spread Information: Theory and Evidence from Two Randomized Controlled Trials," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 86(6), pages 2453-2490.
    16. Bloch, Francis & Quérou, Nicolas, 2013. "Pricing in social networks," Games and Economic Behavior, Elsevier, vol. 80(C), pages 243-261.
    17. Arellano-Bover, Jaime & Saltiel, Fernando, 2021. "Differences in On-the-Job Learning across Firms," IZA Discussion Papers 14473, Institute of Labor Economics (IZA).
    18. Itay P. Fainmesser & Andrea Galeotti, 2016. "Pricing Network Effects," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 83(1), pages 165-198.
    19. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-440, June.
    20. R. Preston McAfee & John McMillan & Michael D. Whinston, 1989. "Multiproduct Monopoly, Commodity Bundling, and Correlation of Values," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 104(2), pages 371-383.
    21. Ilya Segal, 1999. "Contracting with Externalities," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 114(2), pages 337-388.
    22. Ozan Candogan & Kostas Bimpikis & Asuman Ozdaglar, 2012. "Optimal Pricing in Networks with Externalities," Operations Research, INFORMS, vol. 60(4), pages 883-905, August.
    23. Segal, Ilya, 2003. "Coordination and discrimination in contracting with externalities: divide and conquer?," Journal of Economic Theory, Elsevier, vol. 113(2), pages 147-181, December.
    24. Gabriel Carroll, 2017. "Robustness and Separation in Multidimensional Screening," Econometrica, Econometric Society, vol. 85, pages 453-488, March.
    25. Mohammad Akbarpour & Piotr Dworczak & Scott Duke Kominers, 2020. "Redistributive allocation mechanisms," GRAPE Working Papers 40, GRAPE Group for Research in Applied Economics.
    26. Jean-Charles Rochet & Lars A. Stole, 2002. "Nonlinear Pricing with Random Participation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 69(1), pages 277-311.
    27. Roger B. Myerson, 1981. "Optimal Auction Design," Mathematics of Operations Research, INFORMS, vol. 6(1), pages 58-73, February.
    28. Jehiel, Philippe & Moldovanu, Benny & Stacchetti, Ennio, 1999. "Multidimensional Mechanism Design for Auctions with Externalities," Journal of Economic Theory, Elsevier, vol. 85(2), pages 258-293, April.
    29. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jadbabaie, Ali & Kakhbod, Ali, 2019. "Optimal contracting in networks," Journal of Economic Theory, Elsevier, vol. 183(C), pages 1094-1153.
    2. Chen, Ying-Ju & Zenou, Yves & Zhou, Junjie, 2022. "The impact of network topology and market structure on pricing," Journal of Economic Theory, Elsevier, vol. 204(C).
    3. Li, Jian & Zhou, Junjie & Chen, Ying-Ju, 2021. "The Limit of Targeting in Networks," ISU General Staff Papers 202112081957590000, Iowa State University, Department of Economics.
    4. Li, Jian & Zhou, Junjie & Chen, Ying-Ju, 2022. "The limit of targeting in networks," Journal of Economic Theory, Elsevier, vol. 201(C).
    5. Yang Zhang & Ying-Ju Chen, 2020. "Optimal Nonlinear Pricing in Social Networks Under Asymmetric Network Information," Operations Research, INFORMS, vol. 68(3), pages 818-833, May.
    6. Duan, Yongrui & Feng, Yixuan, 2021. "Optimal pricing in social networks considering reference price effect," Journal of Retailing and Consumer Services, Elsevier, vol. 61(C).
    7. Meng, Dawen & Tian, Guoqiang, 2008. "Nonlinear Pricing with Network Externalities and Countervailing Incentives," MPRA Paper 41212, University Library of Munich, Germany, revised Aug 2008.
    8. Elias Carroni & Paolo Pin & Simone Righi, 2020. "Bring a Friend! Privately or Publicly?," Management Science, INFORMS, vol. 66(5), pages 2269-2290, May.
    9. Alexandre Belloni & Changrong Deng & Saša Pekeč, 2017. "Mechanism and Network Design with Private Negative Externalities," Operations Research, INFORMS, vol. 65(3), pages 577-594, June.
    10. Belhaj, Mohamed & Deroïan, Frédéric, 2019. "Group targeting under networked synergies," Games and Economic Behavior, Elsevier, vol. 118(C), pages 29-46.
    11. Belhaj, Mohamed & Deroïan, Frédéric, 2021. "The value of network information: Assortative mixing makes the difference," Games and Economic Behavior, Elsevier, vol. 126(C), pages 428-442.
    12. Bloch, Francis & Shabayek, Shaden, 2023. "Targeting in social networks with anonymized information," Games and Economic Behavior, Elsevier, vol. 141(C), pages 380-402.
    13. Zenou, Yves & Chen, Ying-Ju & Zhou, Junjie, 2020. "Network Topology and Market Structure," CEPR Discussion Papers 14495, C.E.P.R. Discussion Papers.
    14. Nora, Vladyslav & Winter, Eyal, 2024. "Exploiting social influence in networks," Theoretical Economics, Econometric Society, vol. 19(1), January.
    15. Andrea Galeotti & Benjamin Golub & Sanjeev Goyal, 2020. "Targeting Interventions in Networks," Econometrica, Econometric Society, vol. 88(6), pages 2445-2471, November.
    16. Arthur Campbell & C. Matthew Leister & Yves Zenou, 2020. "Word‐of‐mouth communication and search," RAND Journal of Economics, RAND Corporation, vol. 51(3), pages 676-712, September.
    17. Itay P. Fainmesser & Andrea Galeotti, 2013. "The Value of Network Information," Working Papers 2013-13, Brown University, Department of Economics.
    18. Jullien, Bruno & Pavan, Alessandro & Rysman, Marc, 2021. "Two-sided Markets, Pricing, and Network Effects," TSE Working Papers 21-1238, Toulouse School of Economics (TSE).
    19. Leduc, Matt V. & Jackson, Matthew O. & Johari, Ramesh, 2017. "Pricing and referrals in diffusion on networks," Games and Economic Behavior, Elsevier, vol. 104(C), pages 568-594.
    20. Panebianco, Fabrizio & Verdier, Thierry & Zenou, Yves, 2016. "Innovation, Pricing and Targeting in Networks," CEPR Discussion Papers 11398, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    Multidimensional screening; Externality; Ironing; Influence;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D62 - Microeconomics - - Welfare Economics - - - Externalities

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sef:csefwp:605. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Dr. Maria Carannante (email available below). General contact details of provider: https://edirc.repec.org/data/cssalit.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.